How China Influences Bitcoin Price, Explained

Published by on February 17, 2017|Comments Off on How China Influences Bitcoin Price, Explained

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There is a multitude of factors at play here but the most important one is that the vast majority of the world’s Bitcoin trading volume and mining power are concentrated in China.

Bitcoin, as a technology, was designed to operate in a decentralized manner. That means that no single center of authority should be able to make decisions on behalf of all users of the network. However, the value of “the most democratic form of money” seems to be too heavily impacted by the actions of just one Central Bank – the PBoC.

So you might wonder, how is that possible? The answer is that despite being idealized as a revolutionary and independent invention, Bitcoin has to operate in a real-world environment. And in our case, the reality is that the majority of Bitcoin trading, estimated from 50 percent to 98 percent, and mining, allegedly between 50 percent and 70 percent, takes place in China. Also important is the fact that Bitcoin is used as a vehicle for capital flight out of China. Savers and investors frequently use the cryptocurrency as an alternative holding asset against a weakening Yuan. This makes any tiny bit of regulatory interference send major ripples across the network.

There is also a view that Bitcoin trading in China is highly speculative by nature. There are several reasons for that. It is reported that a lot of traders are prone to taking high risks and some don’t even know how Bitcoin works, so they disregard the political and technological implications of the cryptocurrency and only use it as a means of investment. There is also evidence of a significant negative correlation between Yuan and Bitcoin prices.

All these factors result in an unbalanced market, which is mostly driven by traders’ sentiment. Whenever the PBoC tries to use heavy-handed regulation to protect its own interests, it results in panic, even if it was not the original intention. Given China’s huge market share, that panic quickly cascades throughout the world and sends Bitcoin price down.